by Calculated Risk on 2/12/2011 12:30:00 PM

Last year I looked at some of the cyclical and long term trends for the participation rate: Labor Force Participation Rate: What will happen?. I concluded that most of the decline in the participation rate is due to changes in demographics - not cyclical. I also noted that it is possible that long term trends - especially more older workers participating in the labor force - could push the participation rate up to 66% by 2015 before the participation rate would start to decline again.

Sven Jari Stehn at Goldman Sachs put out a research note last night arguing there would only be a small increase in the participation rate over the next two years as the economy recovers:

• Economic recovery should draw some additional workers into the labor force in the next 1-2 years. But there is little evidence for the idea that an “unduly” low participation rate is masking an even weaker labor market than indicated by the 9% unemployment rate. Instead, we find that most of the drop in participation in recent years reflects changes in the underlying demographics and the “normal” effects of the economic cycle (i.e., the fact that a 9% unemployment rate in itself is very high). Our analysis implies that the overall labor force participation rate will edge up by ¼ to ½ percentage point over the next two years. If so, job growth will need to average 200,000 jobs per month to push the unemployment rate
down to 8% by the end of 2012, consistent with our forecast.

• These projections are based on our analysis of the structural and cyclical drivers of labor force participation. Population aging should push down the participation rate as older individuals are less likely to participate in the labor force than their younger counterparts. “Secular trends” in the participation profile of different population groups are likely to reinforce this downward trend, as participation of young workers and (to a lesser extent) of prime-age men continues to decline. In combination these structural trends should push down the participation rate by around ¼ point per year.

• The economic recovery, however, should attract some workers back into the labor force and thus offset the demographic trends above in the next couple of years. Taken together our analysis projects a participation rate of 64.7% at the end of 2012—up a modest 0.4 point from the current rate.

This analysis is important because it suggests the large decline in the participation rate is mostly because of demographics, and only a portion of because of the decline because of cyclical effects. So the bounce back will probably not be as large as some people expect.

Here is a look at some the long term trends (updating graphs through January 2011):

Click on graph for larger image in graph gallery.

This graph shows the changes in the participation rates for men and women since 1960 (in the 25 to 54 age group - the prime working years).

The participation rate for women increased significantly from the mid 30s to the mid 70s and has mostly flattened out. The participation rate for men has decreased from the high 90s to 88.6% in January 2011.

There will probably be some "bounce back" for men (some of the recent decline is probably cyclical), but the long term trend is down.

This graph shows that participation rates for several key age groups.

There are a few key long term trends:
• The participation rate for the '16 to 19' age group has been falling for some time (red).

• The participation rate for the 'over 55' age group has been rising since the mid '90s (purple), although this has stalled out a little recently (perhaps cyclical).

• The participation rate for the '20 to 24' age group appears to be falling too (perhaps more education before joining the labor force). Also note the sharp decline over the last couple of years - that will probably turn around quickly as the job market improves.

The third graph shows the participation rate for several over 55 age groups. The red line is the '55 and over' total seasonally adjusted. All of the other age groups are Not Seasonally Adjusted (NSA).

The participation rate is generally trending up for all age groups. And this might push the overall participation rate up over the next 5 years. After that the 'over 55' participation rate will probably start to decline as the oldest baby boomers move into even older age groups.

If these trends for older workers continue, the participation rate might rise a little further than Sven Jari Stehn is forecasting. But the key point is most of the recent decline in the participation rate is due to demographics and not because of cyclical effects - although there will probably be some small bounce back of the next couple of years.

by Calculated Risk on 2/12/2011 09:04:00 AM

Note: this is an unofficial list of Problem Banks compiled only from public sources.

Here is the unofficial problem bank list for Feb 11, 2011.

Changes and comments from surferdude808:

After five removals and three additions, the Unofficial Problem Bank List has two fewer institutions this week at 944, but assets increased by $1.8 billion to $413 billion.

Removals include the four failures this week -- Peoples State Bank, Hamtramck, MI ($430 million Ticker: PSBG); Canyon National Bank, Palm Springs, CA ($221 million Ticker: CYBA); Sunshine State Community Bank, Port Orange, FL ($141 million); and Badger State Bank, Cassville, WI ($87 million); and one action termination against Woodforest Bank, Refugio, TX ($141 million).

Additions include Southwest Securities, FSB, Dallas, TX ($1.8 billion Ticker: SWS); Carver Federal Savings Bank, New York, NY ($755 million); and Community Bank-Wheaton/Glen Ellyn, Glen Ellyn, IL ($332 million Ticker: CFIS).

Other changes include Prompt Corrective Action orders issued against Community Banks of Colorado, Greenwood, CO ($1.7 billion); and First Peoples Bank, Port St. Lucie, FL ($241 million Ticker: FPBI). Next week we anticipate the OCC will release its actions through January 2011. Until then, as we always hope for, have a safe banking week.

by Calculated Risk on 2/11/2011 10:10:00 PM

From Fed Governor Sarah Bloom Raskin: Putting the Low Road Behind Us. Excerpt:

Late last year, the federal banking agencies began a targeted review of loan servicing practices at large financial institutions that had significant market concentrations in mortgage servicing. The preliminary results from this review indicate that widespread weaknesses exist in the servicing industry. The agencies intend to report more specific findings to the public soon, but I can tell you that these deficiencies pose significant risk to mortgage servicing and foreclosure processes, impair the functioning of mortgage markets, and diminish overall accountability to homeowners.

I'm sure this has been said, but I'll say it again because I have seen little to no evidence of improvement in the operational performance of servicers since the onset of the crisis in 2007: Until these operational problems are addressed once and for all, the foreclosure crisis will continue and the housing sector will languish.
...
I do not want to revisit all of the sordid events that brought us to economic crisis in 2008 but, suffice it to say that, in the housing sector, we traveled a very low road that had nothing to do with looking out for the greater good.

This report should be released soon ... and it should be a scathing review of the mortgage servicing industry.

by Calculated Risk on 2/11/2011 09:20:00 PM

From the FDIC: Pacific Premier Bank, Costa Mesa, California, Assumes All of the Deposits of Canyon National Bank, Palm Springs, California

As of December 31, 2010, Canyon National Bank had approximately $210.9 million in total assets and $205.3 million in total deposits ... The FDIC estimates that the cost to the Deposit Insurance Fund (DIF) will be $10.0 million. ... Canyon National Bank is the eighteenth FDIC-insured institution to fail in the nation this year, and the first in California.

Four down today ...

by Calculated Risk on 2/11/2011 07:08:00 PM

Punxsutawney's kin
Badger State saw it's shadow
Now no early Spring.
by Soylent Green is People
From the FDIC: Royal Bank, Elroy, Wisconsin, Assumes All of the Deposits of Badger State Bank, Cassville, Wisconsin

As of December 31, 2010, Badger State Bank had approximately $83.8 million in total assets and $78.5 million in total deposits ... The FDIC estimates that the cost to the Deposit Insurance Fund (DIF) will be $17.5 million. .... Badger State Bank is the seventeenth FDIC-insured institution to fail in the nation this year, and the second in Wisconsin.

Three down today.

by Calculated Risk on 2/11/2011 06:09:00 PM

Sunshine State collapse.
Bankers drank up all the juice
Leaving us the rind
by Soylent Green is People
From the FDIC: Premier American Bank, National Association, Miami, Florida, Assumes All of the Deposits of Sunshine State Community Bank, Port Orange, Florida

As of December 31, 2010, Sunshine State Community Bank had approximately $125.5 million in total assets and $116.7 million in total deposits. ... The FDIC estimates that the cost to the Deposit Insurance Fund (DIF) will be $30.0 million. ... Sunshine State Community Bank is the fifteenth FDIC-insured institution to fail in the nation this year, and the second in Florida.

Hamtramick failure
First the bank, soon the City
Inevitable
by Soylent Green is PeopleFrom the FDIC: First Michigan Bank, Troy, Michigan, Assumes All of the Deposits of Peoples State Bank, Hamtramck, Michigan

As of December 31, 2010, Peoples State Bank had approximately $390.5 million in total assets and $389.9 million in total deposits. ... The FDIC estimates that the cost to the Deposit Insurance Fund (DIF) will be $87.4 million. ... Peoples State Bank is the sixteenth FDIC-insured institution to fail in the nation this year, and the first in Michigan.

Also the FDIC announced the closing the temporary West Coast office.

The Board authorized the temporary office for an initial three-year term, with the option of extending it if workload supported such a move. Based on ongoing analysis and in recognition of the signs of the improving health of the banking industry in the western United States, the FDIC has determined that the current projected workload does not support continuing the temporary office beyond its initial three-year term. The official sunset date for the office will be January 13, 2012.

by Calculated Risk on 2/11/2011 02:20:00 PM

The Obama Administration released an outline this morning on winding down Fannie and Freddie, and for the future of government involvement in the housing finance market.

Here is the Treasury press release on Fannie and Freddie. And here is the report.

The wind down of Fannie and Freddie will be slow and take a number of years, but the key question is what, if anything, will replace them? The plan offers three options:

Option 1: Privatized system of housing finance with the government insurance role limited to FHA, USDA and Department of Veterans’ Affairs’ assistance for narrowly targeted groups of borrowers

The key problem with this first option is what happens when the private markets once again freeze up? With this option, when the next crisis arrives the government would have to scramble (like during the Depression) and come up with some programs to offer financing to qualified borrowers. Prior to the Depression, the most common mortgage loans was short term (like 1 to 5 years), interest only, with a balloon payment due at maturity (see: Mud-Luscious: Balloons for UberNerds for a discussion of balloons). Even though a 50% downpayment was common before the Depression, when these balloon payments came due, the borrower couldn't refinance - even if they had a job, because the private market was completely frozen. At that lack of financing lead to the formation of FHA and FNMA. (To understand the names, see Tanta's: On Maes and Macs)

So we could just scramble again, or have some sort of small program running that could be scaled up during the next crisis as proposed in Option 2.

Option 2: Privatized system of housing finance with assistance from FHA, USDA and Department of Veterans’ Affairs for narrowly targeted groups of borrowers and a guarantee mechanism to scale up during times of crisis

This backstop would maintain a minimal presence in the market during normal times, but would be ready to scale up to a larger share of the market as private capital withdraws in times of financial stress. One approach would be to price the guarantee fee at a sufficiently high level that it would only be competitive in the absence of private capital. It would thus only expand when needed, and that need would be dictated by the market. An alternative approach would restrict the amount of public insurance sold to the private market in normal times, but allow the amount of insurance offered to ramp up to stabilize the market in times of stress.

Option 3: Privatized system of housing finance with FHA, USDA and Department of Veterans’ Affairs assistance for low- and moderate-income borrowers and catastrophic reinsurance behind significant private capital

This is another way of providing mortgages during the next crisis, however I think this approach takes on too much risk.

And while the capital requirements, oversight of the private mortgage guarantors, and premiums collected to cover future losses will together help to reduce the risk to the taxpayer, the reinsurance of private-lending activity, by its nature, exposes the government to risk and moral hazard. If the oversight of the private mortgage guarantors is inadequate or the pricing of the reinsurance too low or recoupment of costs too politically difficult, then private actors in the market may take on excessive risk and the taxpayer could again bear the cost.

My initial reaction is that Option 2 is the best approach.

by Calculated Risk on 2/11/2011 11:35:00 AM

From the NY Times: Mubarak Steps Down, Ceding Power to Military

President Hosni Mubarak of Egypt turned over all power to the military, and left the Egyptian capital for his resort home in Sharm el-Sheik, Vice President Omar Suleiman announced on state television on Friday.

al Jazeera Live blog Feb 11 - Egypt protests

6:03pm: He's gone. He's resigned. 30 years of Mubarak rule is over. Omar Suleiman says:
"President Hosni Mubarak has waived the office of president."

by Calculated Risk on 2/11/2011 09:55:00 AM

NOTE: Here is the Fannie and Freddie press release and report (I'll post on it later).

The preliminary Reuters / University of Michigan consumer sentiment index increased to 75.1 in February from 74.2 in January.

Click on graph for larger image in graphics gallery.

This was at the consensus forecast of 75.0.

Sentiment is still at levels usually associated with a recession - and sentiment is well below the pre-recession levels.

In general consumer sentiment is a coincident indicator.

by Calculated Risk on 2/11/2011 08:30:00 AM

The Department of Commerce reports:

[T]otal December exports of $163.0 billion and imports of $203.5 billion resulted in a goods and services deficit of $40.6 billion, up from $38.3 billion in November, revised. December exports were $2.8 billion more than November exports of $160.1 billion. December imports were $5.1 billion more than November imports of $198.5 billion.

Click on graph for larger image.

The first graph shows the monthly U.S. exports and imports in dollars through December 2010.

Imports had been mostly flat since May, but increased again in December. Exports have started increasing again after the mid-year slowdown.

The second graph shows the U.S. trade deficit, with and without petroleum, through December.

The blue line is the total deficit, and the black line is the petroleum deficit, and the red line is the trade deficit ex-petroleum products.

The petroleum deficit increased in December as both quantity and import prices continued to rise - averaging $79.78 in December. Prices will be even higher in January. Once again oil and China deficits are essentially the entire trade deficit (or even more).